Indonesian Islamic Bonds Gain a Foothold
|Our Correspondent||May 4, 2009|
The recent issuance of $650 million of Indonesian government dollar-denominated retail Islamic bonds with a five year maturity and an 8.8 percent yield, backed by a 100 percent government guarantee and underlying assets, received orders totaling $4.7 billion and was massively over-subscribed.
That is despite the global economic and financial crisis and question marks over poor Western banking and finance practices, with possible repercussions for Islamic banking and finance. Bond proceeds will be used to finance government debt.
Islamic banking and finance remain underdeveloped in Indonesia, with only 3.79 million customers in 2008 and just over 589,000 loans, compared to 512,000 in 2007, in a country with a population of 230 million. The industry only has about 1,500 outlets compared to 6,500 conventional banking outlets and needs substantial investment plus up to 25,000 new staff if it is to increase its share from 3 percent of banking assets up to the targeted 5 percent.
Ahmad Riawan, the chairman of the Indonesia Shariah Bank Association, noted in a recent Jakarta seminar on the shariah economy that the central bank, Bank Indonesia, is confident the that it can contribute to Indonesian development without leading to inflationary pressures, since it forbade transactions involving derivatives and high leverage.
The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, or AAOIFI, led by its secretary-general Dr. Mohamed Nedal Alchaar, recently said the organization it will launch a global study to see how Islamic financing markets are adhering to benchmarks, with a view to standardizing products, to remove a key barrier to the growth of Islamic finance.
AAOIFI sets accounting, auditing and governance standards for the plus $1 trillion Islamic finance sector, but the chairman of its board of scholars shocked markets in 2007 by declaring that 85 percent of Islamic bonds were not shariah-compliant as they include repurchase undertakings. These remarks reportedly contributed to a big drop in issuance of Islamic bonds in 2008.
The Indonesian Finance Ministry pointed out that "The issuance is the largest [recent] straight issuance of dollar-denominated sukuk (securitized financial instruments) outside of the Gulf Cooperation Council (GCC) and it is the first benchmark of dollar denominated sukuk in Asia since 2007".
The global sukuk were ordered by investors from Asia (32 percent) Middle East (30 percent) the United States (19 percent) Europe (11 percent) and Indonesia (8 percent). Orders were made via fund managers (45 percent), banks (37 percent) retail investors (14 percent) and insurance and pension fund companies (4 percent).
Meanwhile in Jakarta the Finance Ministry has introduced the Indonesian Haj Funds Sukuk (SDHI), overseen by the central bank and the Supreme Audit Agency (BPS), offering a one-year Islamic bond with a fixed coupon of 8.52 percent on maturity, backed by 100 percent government guarantee and underlying assets.
The current holdings of trust funds by the Religious Affairs Ministry amounted by April 2009 to about $1.6 billion in Haj Trust Funds and Ummah Trust Funds, mostly held in Indonesian rupiah, with about $650 millions coming in annually.
The SDHI bonds mean a higher return on funds and lower risk of mismanagement. Public officials and politicians are alleged to have embezzled the interest on Haj and Ummah trust funds. The Religious Affairs Ministry will buy Rp 9 trillion of sukuk this year (about $830 millions).
In Indonesia Islamic bonds are also being used by government to clean up public administration as well as to finance the state budget.
Although sukuk proceeds will be used to help plug a forecast $12.8 billion gap in the 2009 state budget to counter the global economic crisis, the success of the dollar-denominated retail issue reflected its good terms, the strength of underlying assets and the outstanding reputation of Indonesia for political and economic stability, relative to most countries in ASEAN and globally.
Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.